AI will lead to an unavoidable market crash, cause 'massive' financial crisis warns Wall Street watchdog

Gary Gensler, the Chairman of the US Securities and Exchange Commission (SEC), has issued a stark warning about the potential consequences of unregulated artificial intelligence in the financial sector. Gensler expressed deep concerns that if regulators do not take immediate action, AI could be the catalyst for a financial catastrophe within the next decade.

In an interview with the Financial Times, Gensler outlined a critical issue in the world of AI within finance. He emphasized the risk associated with major financial institutions all relying on the same AI models.

With limited variations in AI tools, widespread adoption of identical models could result in herd behaviour among banks and other significant economic players, leading to simultaneous decision-making. This, in turn, could trigger a sudden market shift that sets off a chain reaction, potentially causing the next financial crisis.

Gensler commented, “I do think we will in the future have a financial crisis, and in the after-action reports, people will say, ‘Aha! There was either one data aggregator or one model… we’ve relied on.’ Maybe it’s in the mortgage market. Maybe it’s in some sector of the equity market.”

The finance industry is already rapidly advancing in this direction, with many firms incorporating AI tools into their operations for both consumers and employees. AI-driven data analysis is becoming a cornerstone of business models.

Over the past year, AI accessibility has expanded, making it easier and more affordable to integrate into various financial activities.

However, Gensler highlighted the regulatory challenges posed by AI in finance. The SEC’s authority primarily covers financial markets, while AI tools are largely in the hands of tech companies.

This divide leaves a regulatory gap that has yet to be addressed by Congress. Gensler noted the inadequacy of the current regulatory system, which focuses on individual institutions rather than the broader use of AI in finance.

Gensler acknowledged the complexity of addressing this “hard financial stability issue” because existing regulations mainly pertain to individual banks, money market funds, and brokers. He emphasized that this challenge transcends the SEC’s jurisdiction and requires cross-regulatory collaboration.

While Gensler pledged to act in the best interest of the American public by creating rules within the confines of the law, his concerns about AI in finance seem to hint at the immense challenges ahead, underscoring the urgency of developing a comprehensive regulatory framework for AI in the financial sector.